Both the euro and the yen are giving extremely interesting signals for the longer term at the moment, so lets take a closer look at what exactly is happening here. Click any charts for full screen versions.
10 days of euro trading, hourly candles
I’m going to start easy with something relevant and recent: euro. The double bottom level at the early chart around 1.35 is clearly visible, and the question is if there will be a triple bottom or a significant fall. Fundamentally, there seems to be the reasoning that instead of discussing the immediate future (which consisted of the German EFSF ratification vote) we can now look longer term and realize that things are looking really bad. Technically, it appears like the euro is trading like the double will be broken. First off, the triple top near 1.38 says enough, but the rejection at the 1.362 level was also significant given the early trading pattern and 1.362 acting as an inconsistent S/R line.
More importantly, the Friday trading action was extreme in some senses. First: it was preceded by price falling into a 72hr EMA leading the SMA ditto twice on Thursday, which set it up for quick crosses and MA’s sailing higher with price falling. Then of course next is the push into contracting Bollingers Friday morning, which was rejected weakly and then led to expansion due to the new falls. What was extreme about this is the action near the Bollinger later: break, retrace, and immediately post not one, but two doji’s near the Bollinger. When it finally touches, the final sell-off starts. Touching from outside is something I call a “ghost touch”: if traders are so certain about price action that even bringing it back into two standard deviations of the moving average which is moving with you is not enough, then you have a firm directional trade. The Bollingers are often better for sentiment gauging and together with other indicators they can often provide helpful interpretations of trends and ranges, but when the levels themselves “solidify” and allow you to “touch the ghost” you can be certain that people are finding any excuse they can for taking a trade a certain way, and your fears can really materialize. (This rarely happens during normal market conditions.) Magic-D shows further divergence at these levels, which indicates momentum being strongly with the bears and no turning in sight, and the DMI agrees! Three black crows as well to finish it off, and below any hourly close the last few days to boot, at near 9 month bottom? Strong enough momentum to last if you ask me, but I won’t deny the pleasure it would give me to buy long options here and be right off a simple triple touch!
If down, then where to?
This is better looked at in the longer term, and for that, I will try my hand at interpreting the Ichimoku charts!
Ichimoku weekly candle chart for the last 4 years.
First off, we could see a longer bearish trend overall, with lower peaks and bottoms, so for any investors that might be important to consider. In the nearer term, the flat bottom looms a hair above 1.30, and it managed to enter the cloud despite a strong cloud expansion. Before, the euro has been reluctant to enter in cloud expansions, picking either contractions, windows or rather stale markets to do so. It would be impossible here to ignore the effect of the Tenkan-Kijun cross set off a month ago, which sparked the fall and has since set off a few rather interesting signals in other indicators on these time frames.
First, the DMI is gaining ground, indicating that the fall could be stronger, in line with fundamentals. However, the DMI here is not fundamental, it’s just roughly half a year which comes from the 24 setting I use as default. Be wary in reading too much into this, which also applies for the Magic-D. Still, what is much, much more important here is that the MACD line itself is significantly falling, which has not occured since the 2009 peak! Trading sentiment is seriously turning sour on the euro longer term, which you already knew, but the indicators are starting to pile into the picture and restricting any possible up-moves.
The initial call would be for the flat bottom of the cloud, at around 1.308, with some vibration to the big figure at 1.30. If it happens during a longer period than two weeks, news flow could perhaps embolden bulls to go in and hope for the best, but this is likely to be hemmed by the Kumo top, Kijun and Tenkan lines at least prior to breaking 1.40 again. If shorter than two weeks, you have a little display shop of horrors to pick from, with either May-10, Aug-10 or Dec-10 bottoms being the most prominent. Either of these could spark a small retracement, which would then have to break a thick, flat bottom Kumo and likely attack the bottom of the four-year trend channel I talked about at the very start. Things are indeed not looking particularly good for the euro. Any information about the EFSF has likely already been priced in to the max, and budget debate worries in the US and Greece Q4 progress will likely instill further flight-to-safety responses come November and December. Spreaking of safe havens…
The yen broke 77 to the USD! Go short?
Better yet, they also announced the increased funds to deal with the currency appreciation abomination! Yay, right? Nope. Honestly, ifTokyo is channeling almost ¥ 15 tn into the economy which is likely to go heavily into capital expenditure (which is a huge multiplier for Japan given their construction and machinery businesses) and energy efficiency measures, and adding taxes which could improve the long term (debt) outlook (expecting inflation/deflation to remain equal here, the reduced incentive to spend could take the edge off the price pressures and thus no worry for currency traders) things are in fact looking pretty sunny for Japan in the near term, compared to either of the other industrialized giants. But breaks above certain big figures are still breaks, so allow me to take a chart that suffers significantly from sampling bias and present to you: daily USDJPY for the last 9 months.
Break above and EMA/SMA positive divergence!
Yes, it broke 77, which was where it was hemmed for the last two weeks. Yes, the EMA is taking an early break from its slide and leaving the SMA some breathing space, which normally would be a yen-bearish signal. However, these are similarities with the point three months ago (arrow) and more importantly volatility is dying a rather quick death at the moment and would further do so off any rises since it’s still being below the SMA. The only bullish signal here would be the Magic-D bounce but those have not been particularly sustained, and the trending environment on daily candles or less is gone so not too much weight can be placed on trend indicators as they are easily reversed. Instead, I would argue that there are further falls to be had. The arrow shows a very similar trading environment: trading off a somewhat tight range created by intervention in the currency market, a problematic outlook (the leg off the arrow was the US budget debate, which we are likely to get a re-run off soon at a newscast near you, and I’ve grown tired of commenting on Europe) and a rather inconsistent S/R line (77 this time, 81.2 then) coupled with falling MA’s. Breaking 78 which is what I see as the current range top accounting for spikes would be a miracle given this fundamental picture, the MA’s above and the falling volatility which underlines how tightly price has traded.
Also, the euro-sellers could go into dollars, but given the much tighter market for yen financial instruments and the smaller portion it makes up of traded currencies, an abysmally small fraction of any euroworry trades would have to go into the yen for it not to rise versus the greenback. I simply do not see this as the case, and the yen will disproportionately rise compared to the inflow levels. The SNB didn’t help by anchoring CHF at 1.20 to the euro, and that was way more forceful than anything the Japanese are likely to impart on the market, especially with fiscal hawk Noda in charge.
I don’t dare call a yen top, but a push down to 78 would to me seem highly unlikely, with 79 bordering the realm of possibility. The day the yen hits 80 I will go to Tokyo and buy/spend anything I can given the once-in-a-lifetime discount I’ll get!